ir35 and the recruitment sector - viqu · the power of being understood. mark morton partner 07725...
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AUDIT | TAX | CONSULTING
IR35 AND THE RECRUITMENT SECTOR
September 2019
THE POWER OF BEING UNDERSTOOD
Mark Morton
Partner
07725 070 100
Ainsley Wainwright
Director
07436 268 513
RSM
Agenda for today’s session
Introduction and overview of the new rules
Determining if IR35 applies
Next steps
Introduction and
overview of the new
rules
What is IR35 and off payroll working?
• IR35 is legislation aimed at identifying individuals who
work ‘off payroll’ through intermediaries such as Personal
Service Companies (PSC) who are in fact disguised
employees.
• The intention of IR35 is that if these individuals work like
employees they should pay broadly the same tax and NIC
as employees.
• Under the current IR35 rules, the onus is on the PSC to
self assess as to whether the legislation applies. This has
led to wide spread non compliance.
• Separate obligations require recruitment agencies to
determine employment status where self employed (not
PSC) workers are engaged but these obligations are not
part of these IR35 rules
Off-payroll working – a brief history
HMRC have been concerned for sometime about the increased number of off-payroll workers
operating via PSC’s.
Under the original IR35 rules there is an onus on the PSC to
self assess. Because of the number of PSCs HMRC cannot enforce compliance effectively.
From 6 April 2017 responsibility for assessing engagements with
PSCs working in the public sector only, has shifted to the
public sector end-user.
Consequently where engagements between a public
sector end-user and a PSC have the features of employment, the fee payer must account for tax
and NIC (including employer NIC & apprenticeship levy) = Extra
cost for the fee payer.
A consultation in relation to IR35 in the private sector was issued
in May 2018. Budget 2018 confirmed that the public sector
rules will be extended to the private sector from April 2020, but with an exemption for small
businesses.
March 2019 HMRC issued a policy paper and consultation document. Draft legislation
followed in July setting out how these rules will operate from 6
April 2020.
Private sector – changes from 6 April 2020 - impact
• End user to determine if IR35 rules apply to an engagement and to notify the party they contract
with.
• Where an agency (eg recruitment business) is involved they must pass the determination of status
and reason for it onto next party in supply chain.
• Where IR35 rules apply, fee payer who pays the intermediary to apply PAYE and incur costs of
employer’s NIC and Apprenticeship Levy.
• An agency becomes liable for PAYE and NIC if they do not pass the determination along the chain.
• Processes and additional resource required to assess current and future arrangements.
Changing risk profile
To 5 April 2020 Client engages with:
A self employed
individualA UK PSC
An individual
through a UK agency
A PSC through a UK
agency
Who must determine
tax status?Client PSC UK agency PSC
Liability for
PAYE/NIC?Client PSC UK agency PSC
Position from 6
April 2020
Client engages with:
A self employed
individualA UK PSC
An individual
through a UK agency
A PSC through a UK
agency
Who must determine
tax status?Client Client UK agency Client as the End user
Liability for
PAYE/NIC?Client Client as fee payer UK agency
The Agency as fee
payer*
Determining if IR35
applies
Determining if IR35 applies
• IR35 applies where the individual personally performs, or is under an obligation to
personally perform services.
• The legislation is based on a hypothetical contract between a client as the end-
user and the worker.
• Consequently whilst the actual contract in place with the PSC/an Agency is part of
the consideration, it is also necessary to consider the actual working
arrangements on a case by case basis.
• If the worker is supplied via an agency/other third party then the client will need to
notify both the agency/third party and the worker on or before the time the contract
is entered into or if later before the services begin as to whether IR35 applies or
not. Ongoing periodic review will also be required.
Determining whether an arrangement is caught by IR35
The employment status tests
• Status tests have evolved over time but are not currently in the legislation
• More than 10 tests in total but importance varies – 3 key tests considered further below
• Client need to consider the full picture on a case by case basis
• Is it the provision of ‘personal service’?
• Onus will be on the client as the end user to consider status and to pass on the status
determination
• Need for ongoing review of existing arrangements as well as proposed new engagements
• HMRC check employment status tool (CEST) is a good starting point –
www.hmrc.gov.uk/calcs/esi.htm
• These tests are applicable to engagements with self employed workers
Employment status – the main tests
Key factors in determining employment status
Mutuality of
obligation
Personal Service or
right of substitution
Control
The tests - personal service or right of substitution
• Crucial test
• If personal service is not a requirement of the client and a genuine right of substitution exists [and
ideally has been applied] then it is a strong indicator towards self employment and IR35 not
applying
• If however a client insists that the work is done by a named individual and there is no right of
substitution this would equate to personal service and is likely to be within IR35 rules
• Need to consider the contract and the actual working arrangements
• If a right of substitution exists, but permission has to be obtained then this dilutes the position
The tests - control
• The degree of control exercised over how, when, where or what is done is likely to become
increasingly important test
• Master / Servant concept
• The less control = less likely to be caught by IR35
• A significant degree of ‘interference’ by the engager is more akin to employed status eg If the
client is providing specific instructions on how the individual must carry out the work then this
indicates control
Employment status – other tests
Financial risk
In business on own account
Integration
Intention
These factors should be considered when looking at the overall
picture, especially if the main tests are not conclusive
HMRC status tools and guidance
Many end-users in the public sector make their IR35
determination using CEST.
It is a guide and whilst it can be used
as part of the process it should not be regarded as the be all and end all.
Many people have claimed that CEST
is not fit for purpose.
HMRC on the other hand claim that it
gives a clear answer in 85% of cases.
Government commitment to
enhancing CEST and associated
HMRC guidance by 6 April 2020.
HMRC’s Check Employment Status for Tax (‘CEST’) tool
Next steps
Summary of client status determination obligations from 6 April 2020
Client must make status
determinations and
provide reasons to the
worker and the agency (if
applicable)
The status determination
needs to be made with
due consideration of the
contract and working
practices
Possible client led status
disagreement process
will need to be put in
place
ONGOING PERIODIC REVIEW OF ALL DETERMINATIONS
Actions prior to 6 April 2020
Identify current relevant clients
Determine number operating via off
payroll arrangements
Assess arrangements with
complex labour supply chains
CommunicationAssess financial
impact